Use access key #2 to skip to page content.

Obama is tough on the economy

Recs

22

May 19, 2009 – Comments (27) | RELATED TICKERS: T , HMC , GM

HA, it's still early and I haven't finished my first giant cup of coffee yet so when I read the following headline I thought it said "Obama is tough on the economy" and I was like no kidding, higher taxes, huge budget deficits, cap and trade...but the headline actually read "Obama gets tough on fuel economy." I have nothing personal against Obama, just politicians in general.  I'm sure that McCain and his absolute joke of a Veep would have found some way to screw up the economy even worse.

Even though the headline isn't what I thought at first, as someone who works in the auto industry I do find it very interesting. 

In short, Federal government is raising the federal fuel economy standard to 35.5 MPG by 2016.  By then, cars will be expected to get 39 miles per gallon and trucks 30 miles per gallon.  This is up from the current 27.5 mpg for cars and 23.1 for trucks.

I have mixed feelings about this plan.  Part of me loves it because it will reduce the United States' dependence upon foreign oil.  Sending a huge chunk of our money out of the country, to people who hate us no less, is terrible for the economy so raising the fuel standards makes sense. 

I just have to wonder what this means for automakers.  Light trucks and large cars are the most profitable vehicles that they build.  Generally speaking, smaller vehicles are less profitable.  Requiring unprofitable companies to make more of something with the lowest profit margins doesn't sound like the road to recovery to me.

Perhaps the new standard will cause automakers to accelerate their development of plug-in electric vehicles.  If so, that would be fantastic for my portfolio.  I own decent positions in two, clean power companies Exelon and FPL.

It will be interesting to see which automakers are able to come out with attractive, high mileage vehicles.  The import manufacturers, particularly the Japanese like Toyota and Honda, certainly have the lead in this area right now.

This isn't great news for consumers.  The government estimates, which means that these numbers are probably low, that the proposed changes will add around $600 to the up-front cost of cars...on top of the estimated $700 that has already been added to their cost by the previous revisions to fuel economy standards.  An additional $1,300 added to the price of the average vehicle is nothing to sneeze at.  I realize that people will make some of that money back in the money that they save on gas, but still we're talking about an enormous up-front cost.  If one things that $10 per week in paychecks or one-time $250 payments to seniors is stimulative, what would an additional $1,300 every time someone purchases a new vehicle be?

Having said all of this, the changes to the fuel economy rules don't even start until 2012 and who knows what will happen between now and then.  It is entirely possible that the government will change its mind between now and then and alter them again. 

Part of me wonders if we're rolling out changes like this at the wrong time.  Obama seems to have a lot of pots on the fire.  I wonder if it would be better for the current Administration to focus all of their efforts on fixing the economy now rather than implementing things that would actually hurt economic growth in the short-run like cap and trade, increased healthcare coverage, higher fuel economy standards.  All of these things are good for Americans...but they're expensive and very well could act as a drag upon economic growth. 

On the other hand, short term thinking is what got us into this mess.  Perhaps these changes will encourage the development of real industries in the U.S. so that we can reduce our dependence upon consumer spending.  Hmmmmm.

Deej

 

27 Comments – Post Your Own

#1) On May 19, 2009 at 7:16 AM, AbuH (< 20) wrote:

That is a NATURAL incidence! But are you all familiar with “ The Torment of Saint Anthony”? The Torment of Saint Anthony is one of the world's most famous paintings.  The Torment of Saint Anthony is one of the works of the artist Michelangelo.  Not as famous as his sculptures, such as David, or his work in the Sistine Chapel (a four year project), but a famous piece nonetheless. The original was recently confirmed as such and sold at auction for several million, not to the Louvre, or the Vatican, but to the Kimbell Museum of Art in Ft. Worth, Texas.  It's worth any installment loans they needed for the purchase.  Previously known as the Temptation of Saint Anthony, the tourism draw will mean debt relief from buying The Torment of Saint Anthony.

Report this comment
#2) On May 19, 2009 at 7:30 AM, TMFDeej (99.32) wrote:

I was thinking about my latest post while getting ready for work and I realized that I said a lot but really did not come to any conclusion about whether the more stringent fuel economy standards are a good or a bad thing. 

I a strong case can be made for either side.

Looking at things as an investor rather than a citizen I suppose that there really isn'tsuch thing as good or bad...just actions and consequences, both intended and unintended.

Deej

Report this comment
#3) On May 19, 2009 at 7:44 AM, portefeuille (99.60) wrote:

I just have to wonder what this means for automakers.  Light trucks and large cars are the most profitable vehicles that they build.  Generally speaking, smaller vehicles are less profitable.  Requiring unprofitable companies to make more of something with the lowest profit margins doesn't sound like the road to recovery to me.

Well if they had started producing smaller (and less ugly) cars they might have actually had a chance to export some of those ...

I see a Chrysler once a months maybe and the Ford/GM cars "over here" are not quite the ones that are popular in the U.S.

I think it is time to mention the ca. $6 per gallon gas price (for the last couple of years) where I live for the second time (after my somewhat misplaced "health insurance" / "gas price" comment yesterday).

Raise taxes to $4 per gallon and the mpg issue is taken care of very soon ...

Report this comment
#4) On May 19, 2009 at 7:51 AM, JakilaTheHun (99.94) wrote:

I have mixed feelings on this, as well. 

I am not the type of person who believes all taxation is EVIL and destroys the economy.  When you tax, I think you have to be aware of the market and the probable effects of taxation on it. 

That said, I think the biggest problem with our infrastructure right now is our system of taxation and subsidization.  People don't think about how the various governments of the US affect their own preferences via policies.

My main issue is that we almost fully subsidize the road system, treat "public transportation" as if it's supposed to be a profit-making industry, and hence, distort consumer preferences by making driving seem less expensive  and public transportation more expensive. 

I think the gas tax should be raised substantially.  Automobiles cause pollution and sprawl.  Sprawl requires us to fund more governmental services (since we have to cover a larger area).  So even if we don't see, we're basically paying the price via our tax dollars to fund this lifestyle we've built up.  For that reason, higher gas taxes make sense.

Likewise, we're going to have to start using toll roads more.  The traffic jams that are so common on our highways right now are a direct result of the market distortion causes by subsidization of the road system.  I don't think it's realistic to "privitize" the road system, so the only real alternative is to charge fees for some of the higher use roads. 

Report this comment
#5) On May 19, 2009 at 7:53 AM, JakilaTheHun (99.94) wrote:

I didn't really come up with a conclusion in my last post, but it's basically that I think taking steps to encourage public transit and shorter commutes will do more to lower oil consumption than raising fuel standards. 

Report this comment
#6) On May 19, 2009 at 7:58 AM, portefeuille (99.60) wrote:

once a months

once a month

Report this comment
#7) On May 19, 2009 at 8:25 AM, Gemini846 (49.78) wrote:

Without the necessary investment in public transportation that isn't designed by a retard (IE means rideable by people who can afford cars) any innitiative to reduce car emissions will not be noticable.

High Speed, Limited Stop, Light Rail with ample park and ride lots from suburbia where these people are stuck to downtown where jobs are. The problem is that so many of these communities could have been built with these trains installed, but now its extra work to design a system and easily tripples the cost.

Report this comment
#8) On May 19, 2009 at 9:52 AM, russiangambit (29.40) wrote:

Higher gas prices are coming wherther we like it or not. in Texas the answer is definitely NOT, since  majority of people drive huge subarbans, trucks, there is no public transportation and distances are huge. May be we will get some sort of public transportation built finally.

We got a taste of it last summer. When people suddenly started car-pooling, buying Priuses, and thinking twice about buying a house in suburbs. Now everything is back the way it used to be.

I think Obama's plan is good because it will pull people out of their usual complacency and will foprce them to adjust for inevitable future. But they will be kicking and screaming. Americans seem to consider gas under $3 to be a consitutional right. For someone coming from Europe it seems a bit silly. 

Report this comment
#9) On May 19, 2009 at 10:15 AM, ralphmachio (25.70) wrote:

Silly as it may be, we americans are addicted to cheap gas. Raising gas prices may be the straw that broke the camels back with our economy in the future.  

Oil and Auto interests bought all the light rail that america used to have, and scrapped it. That is what happens when industry is let to rule.

Portefueille, I cannot agree more with the ugliness of american vehicles, but Giving taxes to crooked people to invest against the better interest of the people is exactly how we arrived at this juncture. In the end, when this crumbles, know that it is with our own tax dollar that our deception was originally funded. We pay for our own hell.

Report this comment
#10) On May 19, 2009 at 10:31 AM, Melaschasm (54.37) wrote:

"My main issue is that we almost fully subsidize the road system, treat public transportation  as if it's supposed to be a profit-making industry, and hence, distort consumer preferences by making driving seem less expensive  and public transportation more expensive."

In the USA the opposit is true.  The gas tax fully pays for roads, and also subsidizes public transportation systems, including, but not limited to busses, trains, and subways. 

Report this comment
#11) On May 19, 2009 at 10:41 AM, devoish (98.21) wrote:

Using $2.00/gallon and 12,000 miles driven per year, raising fuel economy 12 mpg's (30%) means a savings of $362 each year, against a cost of $600./car.

12000/23.1 x $2= $1038.96

12000/35.5 x $2= $676.

$1038 - $676 = $362.

I don't know how the drivers will afford savings like that.

A tax at $.89/gallon would cost drivers $300/year at 12,000 miles and 35.5 mpg, effectively leaving drivers with $60./year in gasoline savings costs, enough to defray the cost increase of the cars over ten years. 

It also represents a decrease in gasoline consumption of 35%, and whatever savings from supply/demand that gets you, including no need for new refineries.

If we had had a Congress with balls enough to do this 15 years ago, and apply fuel efficiency standards to electricy generation we might not be talking "cap and trade" or "global warming" today.

Report this comment
#12) On May 19, 2009 at 11:54 AM, jmt587 (99.87) wrote:

Melaschasm,

Is that true about the gas tax fully paying for roads?  I just heard a report this morning that in the 90 days since the stimulus bill was signed, the state of Michigan has spent $3.6 Billion of their stimulus money, much of it on road construction projects.  If the gas tax fully paid for roads, why would we need stimulus bill money to pay for roads?  Do you have a source (I don't for the above, but I could find one I'm sure, if you don't believe it)? 

Report this comment
#13) On May 19, 2009 at 12:01 PM, portefeuille (99.60) wrote:

A fuel tax (also known as a petrol tax, gasoline tax, gas tax or fuel duty) is a sales tax imposed on the sale of fuel. In most countries, the fuel tax imposed on fuels which are intended for transportation. Fuels used to power agricultural vehicles, and/or home heating oil which is similar to diesel are taxed at a different, usually lower, rate.

In the United States, the fuel tax receipts are often dedicated or hypothecated to transportation projects so that the fuel tax is considered by many a user fee. In other countries, the fuel tax is a source of general revenue.

(from wikipedia, see here)

Report this comment
#14) On May 19, 2009 at 12:12 PM, awallejr (81.50) wrote:

Rising gasoline prices because of market conditions is one thing.  And while a potentially "good" idea in the long run, jacking up gasoline prices through taxes will simply lead to the voters booting the politicians out of office.  Make no mistake, Obama won because of the state of the economy.  If he wants a 2nd term he best put all his efforts and concentrate improving that first.

Report this comment
#15) On May 19, 2009 at 12:18 PM, JakilaTheHun (99.94) wrote:

In the USA the opposit is true.  The gas tax fully pays for roads, and also subsidizes public transportation systems, including, but not limited to busses, trains, and subways. 

It's cute to make up facts out of thin air, but this isn't actually true.  Public transit systems all have fees for usage.  Most of them are expected to sustain themselves.  Also, the Federal government doesn't control local systems so the Federal gas tax would not cover them.

Plus, as mentioned above, the myth that gas taxes pay for all of your roads is somewhat discredited by "spending bills" that spend general revenues on road construction projects.

Report this comment
#16) On May 19, 2009 at 12:32 PM, JakilaTheHun (99.94) wrote:

Perhaps I should re-state myself:  the Federal Highway Trust does allocate certain portions to mass transit, but the Federal Highway Trust does not fund the road system all by itself.  Nor does the Federal Highway Trust pay for the majority of the costs associated with public transit.  Users have to pay fees in most cities to ride public transit.

Report this comment
#17) On May 19, 2009 at 3:41 PM, Melaschasm (54.37) wrote:

The stimulus bill is an exception to the general rule of road spending coming from gas taxes.  I suppose there is likely some road spending in the katrina emergency funding as well.  However, the gas tax is also used to subsidize public transportation.  The proposed carbon taxes are also going to increase the taxes on automobiles. 

If you do all the math for all of this spending you will find that the gas taxes are a reasonable approximation for road construction most of the time.  However, public transportation is heavily subsidized not only by gas taxes, but also by income, property, and other taxes for most big cities. 

While there are some occasional funds for roads outside of gas taxes, this is a relatively small amount (historically), and the original statement that roads are almost fully subsidized is much further from the truth than my statement.

Report this comment
#18) On May 19, 2009 at 4:45 PM, Melaschasm (54.37) wrote:

In 2007, $10.5 billion was spent on 15 separate transit programs, while $41.5 billion was spent on all highway programs, although some of this money was diverted to transit, hiking trails, and bicycle paths.

The federal fuel tax is currently 18.3 cents per gallon, 2.87 cents of which goes into the "transit account" within the highway trust fund. Another approximately $2 billion in annual federal transit spending is funded by general revenues.

These numbers are not 100% of all data, but they give you a basic idea of where the money spent is coming from.  For this one piece of the budget (not including the stimulus package), Gas taxes subsidize public transportation by $10.5 billion minus $2 billion (from general funds) resulting in a net of $8.5 billion in subsidization of public transportation.

Data from:  http://www.heritage.org/Research/SmartGrowth/bg2269.cfm

From a different article:

In 2006, the most recent period for which data are available, the federal subsidy for public transit amounted to $165.61 per 1,000 passenger miles, while automobiles earned the federal government a $0.93 "profit" per 1,000 passenger miles, in large part because federal fuel taxes paid by motorists are used to subsidize other projects, including transit.

Emphasis added by me. 

Source:  http://www.heritage.org/Research/SmartGrowth/bg2260.cfm

While there are arguements in favor of greater subsidizing of public transportation, the notion that cars are subsidized is not a fair representation of the facts.  And this does not even include the hidden costs of CAFE standards and other regulations, make cars more expensive to drive than they would be. 

Report this comment
#19) On May 19, 2009 at 7:47 PM, JakilaTheHun (99.94) wrote:

Melaschasm,

You're dodging my point. 

The Federal Highway Trust Fund only pays for 42% of Federal highway construction costs.  The rest comes from general revenue and the fund has a massive shortfall: 

http://www.foxnews.com/story/0,2933,274113,00.html

It is not a 'one time thing' as you suggest. Moreover, state governments also construct non-highway roads, which also cost money. 

The Heritage Foundation has an awfully strange method of calculating profits.  Sorta reminds me of the banks.  Or the Army accountants that calculated the cost of a toilet seat at $500 based on their method of allocating overhead equally to all items (apparently, there saw no difference in a tank and a toilet seat and felt they should be allocated the same overhead).  There's literally no way the numbers that Heritage produces could be accurate in any way, shape, or form without extreme distortions.

The majority of public transit funding comes from user fees.  In fact, the user fees on many systems are much higher than the gasoline taxes.  You can drive 300 miles and pay only $1.80 in taxes.  Meanwhile, a trip on a bus often costs $2.00 or more one-way.

Report this comment
#20) On May 19, 2009 at 8:03 PM, JakilaTheHun (99.94) wrote:

And actually, one of the gross distortions of Heritage's method of cost allocation is fairly obvious:  he evaluates based on "number of passenger miles."  That's sort of a nonsensical metric given the fact that the express purpose of public transportation is transport massive numbers of people short distances (in most cases). 

Hence, if it costs $1 Million to construct and operate a subway systems with one track that runs 10 miles and transports 100,000 people in a single year, and user fees pay for $900,000 --- the public subsidy is $10,000 per passenger mile.

Meanwhile, if it costs $4 Million to construct and maintain 400 miles of highway that transports 400,000 people in a single year --- the public subsidy is $10,000 per passenger mile. 

But the rail costs $1 per passenger and the highway costs $10 per passenger.  Not saying this is a realistic example --- simply suggesting that the method of evaluation used by Heritage is grossly distortive at best.

It also ignores all other costs associated with autmotive usage over public transit, including environmental costs, increased governmental services, etc.

Report this comment
#21) On May 19, 2009 at 8:52 PM, Melaschasm (54.37) wrote:

Your Fox News link seems to support my claim that most of the money comes from gas taxes.  I believe the 45% number is basically saying that States and Local governments provide 55% of the funding.  While I am not an expert on every State, it is common for States to use gas taxes to pay for their portion of the road spending.  

Regarding the Heritage Foundation, they are primarily talking about balanced spending between different states, not the value of public transportation.  However, they did provide some specific numbers regarding Federal spending.  Including the data that for the most part federal spending on roads is from gas taxes, and that some of the gas tax money goes to subsidizing public transportation systems.  Regarding the shortages going forward, that might come from spending cuts, general taxes, or new gas taxes (or a carbon tax, which would be a tax on gas and other things).  Below is a chunk of text from your Fox News article.  I suspect that at this point we will have to agree to disagree.  I enjoyed this discussion, and have learned a little bit more about the transportation and energy industries.  Admittedly the way the stimulus bill is written, it is likely that this year and next will result in general tax revenue (or debt) being used for roads.  

The fund provides the overwhelming bulk of federal dollars spent on highways. It gets its money mainly from the 18.4 cents-a-gallon excise tax that drivers pay at the pump.

Self-service regular now tops $3 a gallon. There is concern the price will reach a price at which people will get serious about cutting back on driving — sending less money into the fund. Fuel tax receipts did dip last summer when there was a spike in pump prices.

About 45 percent of all highway spending comes from the trust fund. With less money available from the fund, states must turn elsewhere for money to expand their highways and fill their potholes. That prospect is making lots of people unhappy.

Report this comment
#22) On May 19, 2009 at 8:55 PM, portefeuille (99.60) wrote:

Hence, if it costs $1 Million to construct and operate a subway systems with one track that runs 10 miles and transports 100,000 people in a single year, and user fees pay for $900,000 --- the public subsidy is $10,000 per passenger mile.

Meanwhile, if it costs $4 Million to construct and maintain 400 miles of highway that transports 400,000 people in a single year --- the public subsidy is $10,000 per passenger mile. 

Your calculations are flawed. Please have a look at the definition of "passenger mile" (from here):

A unit of measurement of the passenger transportation performed by a railroad during a given period, usually a year, the total of which consists of the sum of the miles traversed by all the passengers on the road in the period in question.

So in your first example you have $(1000000 - 900000)/(10*100000) = $100000/1000000 = $0.1 subsidy / passenger mile) per year ...

Report this comment
#23) On May 19, 2009 at 8:59 PM, Melaschasm (54.37) wrote:

I see I wandered around a little bit in my last post.  When I said we shall agree to disagree, I am basically saying that I have satisfied myself of the accuracy of my statement.  However, I realize that I may not have convinced you or other readers that I am right.

Have a great day!

Report this comment
#24) On May 20, 2009 at 3:57 AM, RonChapmanJr (70.40) wrote:

-1 rec

Report this comment
#25) On May 20, 2009 at 6:57 AM, TMFDeej (99.32) wrote:

That wasn't very descriptive, Ronald.  -1 rec because...

I don't think that I even came down on one side of the debate.

Deej

Report this comment
#26) On May 23, 2009 at 3:29 PM, RonChapmanJr (70.40) wrote:

Sorry, -1 rec because of this part -

"I'm sure that McCain and his absolute joke of a Veep would have found some way to screw up the economy even worse."

I disagree.

ron

Report this comment
#27) On May 25, 2009 at 5:57 PM, portefeuille (99.60) wrote:

Mankiw on U.S. automobiles:

----------------------------

Friday, May 22, 2009
Counting on Ignorance
I have recently started the process of buying a car (to be used, primarily, by my teenage daughter and, in a couple years, my older son). Like every conscientious consumer, I have been doing a bit of research. In particular, I got a copy of the Consumer Reports auto issue (April 2009).

Page 15 was particularly enlightening. There, in their "Automakers report cards," Consumers Union summarized their findings for each of fifteen major car companies.

Dead last was Chrysler. CU recommended zero percent of the Chrysler vehicles they tested. That's right--zero. Second to last was General Motors. CU recommended 17 percent of GM models. By contrast, most other companies had half or more of their models get the thumbs up. Honda was the top ranked brand; CU recommended 95 percent of its models.

Is it any surprise that Chrysler and GM are now in the process of going out of business? From the perspective of the Consumer Reports advice, it looks like their business model was to count on the ignorance of the buying public about the quality of their products. Their bankruptcy should perhaps be viewed as a success of the market system.

---------------------------- 

(from here)

 

Report this comment

Featured Broker Partners


Advertisement